We analyze the venture capitalist's decision on the timing of the IPO, the offer price and the fraction of shares he sells in the course of the IPO. A venture capitalist may decide to take a company public or to liquidate it after one or two financing periods. A longer venture capital-ist's participation in a firm (later IPO) may increase its value while also increasing costs for the venture capitalist. Due to his active involvement, the venture capitalist knows the type of firm and the kind of project he finances before potential new investors do. This information asymmetry is resolved at the end of the second period. Under certain assumptions about the parameters and the structure of the model, we obtain a single equilibrium in which high-quality firms separate from low-quality firms. The latter are liquidated after the first period, while the former go public either after having been financed by the venture capitalist for two periods or after one financing period using a lock-up. Whether a strategy of one or two financ-ing periods is chosen depends on the consulting intensity of the project and / or on the experi-ence of the venture capitalist. In the separating equilibrium, the offer price corresponds to the true value of the firm.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2003/25.
Length: 27 pages Date of creation: 25 Jan 2003 Date of revision: Handle: RePEc:cfs:cfswop:wp200325
Note: I am grateful for helpful comments from Uwe Walz, Katrin Ullrich, participants of the 2002 FMA European Meeting in Copenhagen and the 2002 Symposium on Finance, Banking, and Insurance in Karlsruhe. Financial support by the German Research Foundation (DFG) is gratefully acknowledged. An earlier version of this paper appeared as: The Decision of Venture Capitalists on Timing and Extent of IPOs (ZEW Discussion Paper No. 03-12). Contact details of provider: Postal: House of Finance, Gr�neburgplatz 1, HPF H5, D-60323 Frankfurt am Main Phone: +49 (0)69 798-30050 Fax: +49 (0)69 798-30077 Email: Web page: http://www.ifk-cfs.de/ More information through EDIRC
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